Minutes before the NBA announced a settlement with Shelly Sterling on Friday afternoon to sell the Clippers, co-owner Donald Sterling provided another twist in the monthlong drama surrounding the franchise.

Sterling filed an antitrust lawsuit against the NBA and Commissioner Adam Silver in U.S. District Court in Los Angeles, seeking more than $1 billion in damages.

The 14-page complaint criticized the league’s handling of Sterling’s $2.5-million fine, lifetime ban and move to terminate his ownership after his inflammatory remarks about African Americans were made public. In language echoing Sterling’s official response to the NBA’s contentions, it said the recording that resulted in the allegations against him was made illegally and in violation of his right to privacy.

“The punishment is capricious, arbitrary, unreasonable, and grossly discriminatory compared with similar ‘speech’ offenses,” the complaint said. “Sterling’s punishment is far and away the most severe ever imposed by an NBA commissioner for any conduct.”

The lawsuit demanded that Sterling’s ban and fine be revoked, the termination proceedings ended and Clippers President Andy Roeser, placed on an indefinite leave of absence by the NBA this month, be restored and that interim chief executive Dick Parsons be ousted.

In another example of the confusing developments that have become routine in this saga, the Sterling Family Trust is a plaintiff in the lawsuit. The Sterlings jointly own the team in the trust. But the headline on the NBA’s statement about Friday’s agreement with Shelly Sterling read: “NBA and Sterling Family Trust announce settlement.”

Shelly Sterling has made herself the lone trustee with sole control of the team, people familiar with the situation said, after doctors who examined her husband this month concluded he wasn’t able to engage in normal business affairs. Donald Sterling’s attorney, Maxwell Blecher, called that assertion “absurd.”

But the accord between the NBA and Sterling’s wife to stop the termination proceedings and allow the franchise to be sold to Steve Ballmer for a record $2 billion may undermine much of the case, according to Gabe Feldman, director of the sports law program at Tulane University.

“If Donald Sterling doesn’t voluntarily dismiss the lawsuit, then the NBA will file a motion to dismiss because there’s absolutely no claim here,” Feldman said. “I wish I could find a word to describe how strange it is. We’ve gone from uncharted territory to ludicrous territory at this point.”

The NBA’s position is the sale was not forced so Sterling’s antitrust claims have no merit.

“Mr. Sterling is complaining about a set of facts that don’t exist,” Buchanan said.

The key word in the NBA’s 109-word statement was Shelly Sterling’s agreement to “indemnify” the league against litigation, including by her husband.

If Donald Sterling proceeds with his lawsuit, he would essentially be suing his wife and the Sterling Family Trust, according to a person familiar with the sale agreement. Shelly Sterling and the Trust would then be obligated to cover any legal fees and losses incurred by the NBA.

Much of the complaint focuses on the termination hearing and Sterling’s concerns over being forced to sell the franchise. But after the NBA accepted the sale of the team to Ballmer, it canceled Tuesday’s hearing in New York. Ballmer still needs to be approved by three-quarters of the league’s 30 owners. No date has been announced for the vote.

Cited in the complaint is a May 22 letter from one of Sterling’s attorneys, Douglas Walton, to the NBA. It authorized Shelly Sterling to negotiate the franchise’s sale and said Donald Sterling “agrees to his sale of his interest” in the Clippers. Sterling does not dispute the contents of the letter.

What could be at issue is whether the sale was considered forced.

The lawsuit makes reference to Ballmer’s bid but doesn’t indicate the sale was made under duress, and that could have tax consequences.

Under Section 1033 of the federal tax code, people who sell property “compulsorily or involuntarily” can be exempt from capital gains tax if they use the profits to replace what they were forced to sell. The “involuntary conversion” statute most often is used in cases of eminent domain, such as the government seizure of private land for a highway, school or other civic purpose.

In the end, the taxes may be what this lawsuit is really all about. If you read through the Complaint, which I’ve embedded below, one of the claims for relief is indeed an order barring the league from stripping Sterling and his family of their ownership interest in the Clippers. However, it seems highly unlikely that this claim will succeed in Court, or that it would do much of anything to stop the sale of the franchise to Ballmer that Mrs. Sterling has negotiated. On the first point, the relavent terms of the NBA Constitution, which are mentioned in the NBA charging document included as an exhibit to the Complaint, seem fairly clear on the matter on the authority of the league to strip ownership rights in circumstances such as this. On the second point, another exhibit to the Complaint is that letter dated May 22nd in which Sterling gives his wife full authority to negotiate a sale of the team. Finally, there’s the fact that the NBA has canceled the vote to terminate Sterling’s franchise. If the franchise isn’t terminated, then there would be nothing for a Court of a law to halt.

On the other hand, it would be to Sterling’s potential advantage if he could get the sale characterized as an involuntary one, which it arguably could be given the fact that it occurred under the threat that the franchise would be terminated if it didn’t occur. As I noted yesterday, Sterling and his family stand to walk away from this deal with Ballmer with a profit of over $1.9 billion. By some estimates I’ve seen, the total capital gains tax liability on that profit could be as high as $400 million. Spending some money on litigation to try to get that tax liability limited in some way doesn’t seem like all that bad idea when you look at it from that point of view. Furthermore, I wouldn’t be surprised if Sterling isn’t going into this lawsuit with the idea of an eventual settlement that includes the NBA and/or Ballmer kicking in all or part of the money to cover the liability in on the capital gains taxes. In other words, the Clippers are going to be sold to Steve Ballmer, all this lawsuit is really about is how big the check to Donald Sterling is going to be when the sale finally goes to settlement.

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About Doug MataconisDoug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway.
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Comments

Donald Sterling will be grousing about his sale of the LA Clippers to Steve Ballmer for $2 billion all the way to the bank. According to the New York Times, Sterling bought the team for $12.5 million in 1981. That’s a 15,900% gain over those 33 years, for an annual return of 16.6% — not even counting his share of profits earned during those years. He and his estranged wife will probably avoid paying taxes on this windfall through a trust that holds the money while they take out their living expenses.

When they die, their heirs will continue to avoid taxes on these gains by using a rule in the tax code that raises the value of all assets to the market price at the time of the benefactors’ death — thereby eliminating all taxable gains (the so-called “stepped-up basis at death” rule). Ballmer will surely use the same techniques to avoid paying capital gains taxes on most of his Microsoft stock, which already has appreciated 55,700% since Microsoft’s public offering in 1986.

As I noted yesterday, Sterling and his family stand to walk away from this deal with Ballmer with a profit of over $1.9 billion. By some estimates I’ve seen, the total capital gains tax liability on that profit could be as high as $400 million. Spending some money on litigation to try to get that tax liability limited in some way doesn’t seem like all that bad idea when you look at it from that point of view.

Heaven forbid they lose a measly $400 million of a $1.9 billion windfall. That would reduce them to $1.5 billion, and what self-respecting person can make do when the government only lets you get away with $1.5 billion?

And people say the tax code is broken. That’s nonsense! We clearly have the best tax code in the world. Where else can a person take a tangible asset, transfer the ownership of it to a fictitious entity called a trust (operated by the same person who owns the asset) and walk away from most of what is the lowest (in practical terms) tax obligation in the world?